Saturday, January 02, 2016

Minimum-wage hikes are politically popular. They’ve long made intuitive sense to voters as a way to boost wages for less-skilled workers. But people on both sides of the debate have generally acknowledged they might cost jobs, until more recent research started suggesting they may not do so at all.

But these findings have been hotly contested, and new research on the role of minimum wages during the Great Recession from UCSD economists Michael Wither and Jeffrey Clemens, ably summarized by UCSD economist James Hamilton, gives us new reason to doubt the wisdom of an increase in the federal minimum wage.

To assess the impact of minimum-wage hikes, Wither and Clemens exploited the fact that the 2007 federal minimum wage hike did not impact every state in the same way, as several states had pre-existing state minimum wages that were higher than the new federal mandate. These states were largely unaffected by the new higher federal wage floor. Wither and Clemens use these states as a baseline to examine the effect of minimum wages in states where federal legislation actually did force changes in compensation.

Their results are striking: minimum-wage hikes hurt low-wage workers through a combination of disemployment (on average, there was a 6 percentage point decrease in the likelihood that a low-wage worker would have a job) and a higher probability of working without pay (internships), which of course not everyone can afford to do. One consequence of this disemployment effect is that the displaced workers in question never had the opportunity to gain experience that might have otherwise allowed them to increase their long-term wages. The net effect was that even taking into account the positive impact of minimum-wage legislation on the wages of those who remained employed; less-skilled workers overall saw average incomes decline through the recession years as a result of minimum-wage legislation.

The authors also find evidence that minimum-wage hikes lead to reductions in mobility. For instance, workers with greater education were more likely to work in internships in response to minimum-wage hikes, while less educated workers remained unemployed. Undesirable though unpaid work might be, it still provided a way for relatively educated workers — many of whom can presumably rely on parental support to meet their expenses — to gain a foothold in the workforce, a pathway increasingly denied to less educated workers. The authors find suggestive evidence that in states where the federal minimum wage had effects, this less-skilled, low-wage population were much less likely to transition into higher wage positions in the medium-term. Where did these workers go instead? Presumably, long-term unemployment: the authors calculate that this episode of minimum wage legislation accounts for as much as 0.7 percentage points in the decline in the national employment-to-population ratio in the period from December 2006 to December 2012, or about 15 percent of the decline during that period.

It is very unlikely that this paper will prove to be the last word in the debate over the minimum wage, not least because the subject is so politically contentious. Yet the authors provide compelling evidence that previous research has vastly underestimated the impact of minimum wages by focusing on broad populations (such as teenage workers, or workers in the fast food industry) rather than isolating the exact populations most affected by minimum-wage legislation: low-skilled workers. It has also largely ignored the role of low-wage work in fostering upward mobility by serving as a stepping stone to acquiring experience and higher-wage employment in the future. In a post-recession environment characterized by the rapid automation of routine job tasks and rising burdens associated with hiring employees, it’s more important than ever that public policy work to ensure that less-skilled workers continue to have access to employment opportunities, including those offering low wages. There’s reason to think a minimum-wage hike might do the exact opposite.